The first week of the federal election campaign has been dominated by heated disputes about the numbers behind both government and opposition policies.
Both sides are under pressure. Notably, the cost of Labor’s 45% emissions-reduction target has been rightly questioned.
Opposition leader Bill Shorten’s answer to reporters that “our 45% reduction, including international offsets, has the same economic impact as the Liberals’ 26%” didn’t exactly engender confidence.
But the folly of Labor’s environmental plans is another tale for another column.
Our focus here is on how the Coalition is going to cut personal income tax by A$158 billion and balance the budget.
Wild assumptions
Earlier this week the Grattan Institute pointed out the Coalition’s budget assumption that expenditure will fall from 24.9% of GDP in 2018-19 to 23.6% during the next decade amounts to cutting spending by more than A$40 billion a year in 2029-30.
This raised the natural question of exactly where those cuts will come from. According to the government, it’s from things such as lower welfare payments and lower interest payments on government debt.
The Grattan Institute’s Danielle Wood described these assumptions as “heroic”. Yup.
Now, you might wonder why the Coalition’s plan to cut personal income tax doesn’t fully kick in until 2025. Or, for that matter, why its “enterprise tax plan” on corporate tax is scheduled to be phased in over a decade.
Playing outside the rules
The short answer is that for the four years following a budget – the so-called “forward-estimates period” – there are rules about banking spending cuts.
During those four years, cuts need to be specified, or economic parameters need to be varied. And with good reason. That way the actual assumptions the government is making, however fanciful they may be, are plain for all to see.
But beyond the four-year period no such discipline applies. This allows governments of all stripes to make very specific claims about, for example, tax cuts they plan to deliver without having to be at all specific about how they are going to pay for them.
This is all just a conjuring trick. Politicians try to get us to focus on the tangible, specific thing we want – tax cuts, more money for hospital or schools, free cancer treatment – while obfuscating how they are going to pay for it.
It’s dirty pool. It’s not cricket. It’s the kind of thing a mob accountant does. Pick your favourite metaphor.
Bipartisan failure
Of course, treasurer Josh Frydenberg and finance minister Mathias Cormann didn’t invent this unscrupulous practice. Wayne Swan and Penny Wong, as treasurer and finance minister respectively, were guilty of these kind of shenanigans too.
The specifics of the current round can’t even be debated properly, because ten-year “guesses” don’t lay out specific assumptions that can be checked for internal consistency and plausibility.
Sadly, it seems futile to hope for cultural change among politicians and a shift to integrity.
To some extent, we need to be the change we want.
The fact both sides of politics so brazenly play us for suckers is as much our fault as it is theirs. If politicians thought there were real consequences at the ballot box for this sort of behaviour, they would think twice.
But there aren’t. When both sides are guilty it’s understandable that voters become so cynical that they just factor it in and look to other issues.
If more voters were willing to make “cooking the books” a decisive issue, that might change.
Need for incentives
Politicians respond to incentives. My favourite illustration of that is how United Nations officials used to be exempt from parking tickets in New York City. As economists Ray Fisman and Ted Miguel showed, when norms alone governed behaviour, officials from corrupt countries basically parked wherever they wanted. Once city authorities got the ability to confiscate diplomatic licence plates of violators, things improved radically.
So as long as the mainstream media refuses to issue our politicians with the moral equivalent of parking tickets for cooking the books of public debate, politicians are going to keep doing it.
Now, many commentators do exactly that – and some of them are brilliant and fearless. But other folks, on the right and on the left, seem to have the attitude that both sides play fast and loose with the facts so it’s fine for them to call out whichever side they personally like the least.
Actually, scratch “seem to have the attitude”. They’ll tell you that to your face.
When Australian cricket captain Steve Smith and vice-captain David Warner got caught in a ball-tampering racket, there were consequences.
When our elected representative do something similar, but with our nation’s finances –with consequences for growth, employment, welfare benefits, retirement incomes, and climate change – they get a pass.
That’s got to stop; and we’ve all got our part to play.
In a big hit announcement before the start of pre-polling, Bill Shorten on Sunday will pledge a A$4 billion boost for child care, making it cheaper for every family earning up to $174,000.
From July 2020, 887,000 families would benefit from the ALP plan, with some being up to $2,100 better off.
Under the initiative:
families with children under five on incomes up to $174,000 would be better off on average by $26 a week – $1,200 a year – per child
the majority of families earning up to $69,000 would get their child care free. This would save them up to $2,100 annually per child.
Families on incomes above $174,000 would continue to receive the same level of support as under current arrangements.
The plan is central to Labor’s campaign on cost of living, with Shorten describing it as “massive cost of living relief for nearly one million families struggling with the costs of child care”.
“Under the Liberals, the costs of child care has gone up 28%, costing families using long day care $3,000 more a year.
“Labor will increase the subsidy families receive, we will kick start the process to limit out-of-control child care price increases, and we will review the impact of the system on vulnerable and very low-income families,” Shorten says.
“This is a $4 billion investment in early education, in working parents and in helping families with the rising cost of living. Labor can pay for cheaper child care for working families because unlike Scott Morrison and the Liberals, we aren’t giving bigger handouts to the top end of town,” Shorten says. The $4 billion cost is over three years.
Source: ALP
The main elements of Labor’s plan include:
More child care fee support
The subsidy rate would be increased from 85% to 100% up to the hourly fee cap (currently $11.77 per hour for long day care) for families earning up to $69,000 who meet the activity test. This would make child care free, or almost free, for up to 372,000 families.
The present tapered reduction would be updated to reflect the higher subsidy rate.
Families earning between $69,000 and $100,000 would receive a subsidy rate between 100% and 85%, up to the hourly fee cap.
Families earning between $100,000 and $174,000 would receive a subsidy rate between 85% and 60% up to the cap – an effective increase of 10%.
Families accessing approved Centre Based Child Care, Family Day Care and Outside School Hours Care, including holiday care, would all benefit from the higher subsidy.
Labor would give the Australian Competition and Consumer Commission a new role of investigating excessive fee increases and unscrupulous child care providers. Findings would be made public through mychildcarefinder.
The ACCC would also look at mechanisms to ensure greater controls on child care fee increases to keep child care affordable.
Reviewing the system for vulnerable children
Labor says that in the nine months of the current subsidy system, the number of vulnerable and very low-income families using it has fallen.
“Reports suggest the numbers accessing the Childcare Safety Net have fallen by almost half, from 35,000 to 21,000.
“Labor will urgently review the new system to make sure that vulnerable and low-income families and children aren’t falling through the cracks,” Shorten says.
Labor has already committed to every three-year-old child being able to receive 15 hours of subsidised preschool. It has also said it would extend the current arrangement for four-year olds.
Shorten says this would create “a two-year program to support the most important years of a child’s development and ensuring our kids don’t fall behind the rest of the world”. For many children this would be free or nearly free.
Labor is also set to make an announcement on boosting the wages of child care workers, who are among the low paid.
The first votes will be cast at pre-polling stations on Monday, as the campaign ramps up in its final three weeks. Scott Morrison and Shorten will meet in Perth late Monday for their first face-to-face debate.
What do US pizza executive Herman Cain, US conservative commentator Stephen Moore, US Chief Justice Earl Warren, and Australia’s Reserve Bank governor Philip Lowe have in common?
More than you might think.
The immediate issue for Lowe is Wednesday’s inflation figures released by the Bureau of Statistics. Inflation for the first quarter of 2019 came in at 0.0%. Zero. Nada.
Taken together, the sum of consumer prices moved not at all between the last quarter of 2019 and the first quarter of 2019. The annual increase (all of it in the last three quarters of last year) was 1.3%.
However you cut the numbers, inflation is now incredibly low. The Reserve Bank’s measures of so-called underlying inflation (that mute the effects of sharp movements in things such as the prices of fruit and vegetables) are at the same level they were in 2016 when the Reserve Bank cut rates twice – in May and then August.
The Reserve Bank must cut
It has to do it again. The market expects it and is pricing in a cut.
Trading on the Australian Securities Exchange implies that 67% of those wagering real money expect the Reserve Bank to cut its cash rate from its present record low of 1.5% to another uncharted low of 1.25% when it next meets to consider rates on Tuesday May 7, a fortnight before the election.
A day earlier, before the release of Wednesday’s shockingly low inflation figure, only 13% expected a cut on Tuesday week.
Three days after the Reserve Bank meeting, and just one week before the election, Lowe is due to release his quarterly report on the state of the economy and his stance on interest rates. He’ll find it easier to write if he justifies a cut.
Not only is inflation far lower than he is his aiming for, but economic growth has plummeted to levels that imply annual growth of closer to 1% than the present 2.3%
or his forecast of 3% by December. Strong house price growth, that would have once been a reason for caution about cutting rates, is no longer a consideration.
A broad cross-section of market economists expect a cut on Tuesday week.
Westpac’s Bill Evans has long predicted 50 basis points of cuts this year, and on Wednesday ANZ economists Hayden Dimes and David Plank said
The downward surprise to core inflation in the first quarter leaves the RBA with little choice but to cut the cash rate by 25 points at its May meeting, with another basis points likely to follow in August
The Reserve Bank’s inflation target of 2-3% has become a joke. Inflation has rarely even entered that range the entire time Lowe has been governor.
Lowe keeps hoping for lower unemployment to spark wages growth, but despite unemployment being consistently at or near its long term low of 5%, nothing much has happened, for almost a decade.
Most observers think that unemployment would need to be much lower – closer to 4% than 5% – for wages to take off.
Politics makes it urgent
Then factor in the election. Labor is odds-on to win. If it does, then there is a chance of fairly radical industrial relations reform. Think about the wish list of Australian Council of Trade Unions Secretary Sally McManus. That seems unlikely to me because of Labor’s extremely sensible economic team, but it’s possible.
Whether it happens or not, until the industrial relations landscape becomes clear businesses are unlikely to do a lot of hiring. Why hire a bunch of folks if you don’t know what you might have to end up paying them or how easy it will be to let them go or change what they do?
That uncertainty is likely to put more downward pressure on wages than whatever upward pressure comes from Labor heavying the Fair Work Commission into reversing its recent penalty-rates decision.
The Bank is losing credibility
All this suggests that the Reserve Bank has waited far too long for wages to tick up of their own accord.
We’ve had recent lessons from the US about the importance of credibility in central banking.
Donald Trump’s nomination of pizza executive Herman Cain to the board of the US Federal Reserve has been withdrawn after sexual harassment allegations, his nomination of Stephen Moore is in doubt after a series of derogatory public remarks he made about women.
They have political problems. Their nominations are in trouble because they are, to put it bluntly, grossly unqualified to govern the Federal Reserve.
The Reserve Bank’s problem is obviously different. It enjoys an impeccable reputation. But repeatedly seeming to ignore inflation numbers (and its own targets for inflation) is putting that reputation at risk.
Having resolve is important. The Reserve Bank isn’t supposed to just do exactly what the market expects or wants it to do.
But getting way out of whack with informed public sentiment without offering good reasons for doing so is very dangerous.
US Chief Justice Earl Warren – the great liberal reformer who desegregated education, ensured the right to a lawyer in criminal cases, and established the principle of one person one vote – was famously mindful of the Court not getting too far ahead of public opinion.
In Brown v Board of Education, which ruled racially segregated education unlawful, Warren worked hard to ensure a unanimous opinion of the Court. That opinion required desegregation “with all deliberate speed” – a phrase that was justly criticised as allowing desegregation to proceed far too slowly, but ensured that the court wasn’t too far out ahead of the Southern states and allowed them to adapt rather than defy it.
The Reserve Bank’s problem is not getting too far ahead of public opinion, it is lagging too far behind.
The consequences can be similar, though. If the public and the markets lose faith in the Bank as an institution – if it seems radically out of touch – then it will lose its ability to persuade and it will risk forced change from the outside.
Forced change is a possibility. Each new government strikes a new agreement with the Reserve Bank governor setting out what it expects of him.
The present one specifies “inflation between 2% and 3%, on average, over time”. If it can be seen that the governor has paid scant regard to the agreement, the new one might make the target more binding, or replace it with a different target.
Treasurer and Reserve Bank Governor, Statement on the Conduct of Monetary Policy, September 19, 2016. Reserve Bank of Australia
It’s time to stop waiting
Governor Lowe waiting for wages to tick up without any underlying factor to cause it to happen is like Waiting for Godot. And it’s getting absurd.
He needs a better narrative than “something will turn up”, and he needs to cut rates. Not with all deliberate speed, but fast.
As I mentioned a few days ago, Treasurer Josh Frydenberg and Prime Minister Scott Morrison recycled three pretty big tax ideas in the 2019 budget, each one originally from the 2018 budget but supercharged, and in one case doubled.
The ideas were:
eventually eliminating the 37% bracket to make the tax system flatter;
upsizing the Low and Middle Income Tax Offset to A$1080; and
increasing the value of business investments that may be written off.
Today I’ll deal with the second: the Low and Middle Income Tax Offset, also known as the LMITO or lamington.
In last year’s budget it was to be worth up to $530 per person, but this year the government intends to more than double that to $1,080. And they’d do so retrospectively, so that by the time people put in their 2019 tax returns, many will get a tax cut more than twice as big as originally expected.
(As it happens, the operative word is “intends”. In budget week Morrison said the Tax Office would be able to make the changes “administratively” without the need for legislation. He didn’t have time to introduce the leglislation and Labor would broadly support it. Last week in its official pre-election overview of the government’s finances, the public service said no. It would need “the relevant legislation to be passed before the increase to the Low and Middle Income Tax Offset can be provided for the 2018-19 financial year”.)
The idea of the lamington
But let’s examine the idea of the lamington anyway because it does have bipartisan support and will become law and part of the tax scales. On one hand, it will deliver a welcome boost to taxpayers on middle and low (but not the lowest) incomes. On the other hand, it will push up a key marginal tax rate and kill incentives in a way the Treasurer hasn’t yet acknowledged.
The offset is a gift of $530 (soon to be $1080) slipped into the tax returns of everyone who earns between $48,000 and $90,000.
People earning more than $90,000 will get less of the offset as their income climbs, up to an income of $125,000 when it the offset will vanish. Low earners will get $200 (soon to be $255), climbing to the maximum of $530 ($1080) as their income climbs from $37,000 to $48,000. People with an income too low to pay tax won’t have any tax to offset, and so will get nothing.
Described in dollar terms as I just have, it’s easy to understand. You can work out the tax cut you’ll get, and the Coaltion has helpfully prepared tables to let you see.
But it is possible to describe the changes in another way, not in dollar terms, but as a new set of marginal rates. And this is where they get interesting, and unattractive.
As a longer-term goal, the Coalition says it wants most taxpayers to pay the same unchanging marginal rate of 30% for all incomes between $45,000 and $200,000. It believes that high marginal rates and frequently changing marginal rates sap incentive.
Frydenberg says the lower, flatter scale would incentivise “people to stay in work, to work longer, to work more”.
So you would think he wouldn’t want to make it bumpy, or lift the marginal rate, which is exactly what his LMITO does.
What the lamington does to those rates
You won’t find the following chart anywhere in the budget papers, but it is what the offsets in this budget and in the last one will do to the tax scale for the next four years before they are replaced by the flatter scale.
First, here’s what we are told the rates look like today:
Now, here’s what they will actually be when you take account of the existing Low Income Tax Offset (or LITO) and the promised supersized Low and Middle Income Tax Offset (LMITO) in the budget.
The graph is lumpy in part because the LMITO is clawed back at the impressive rate of 3 cents for each extra dollar earned between $90,000 and $125,000.
This means it adds 3 cents to the marginal tax rate in that range, pushing it up from 37 cents to a high 40 cents, before at higher incomes it falls back to 37 for taxpayers earning more than $125,000.
Bizarrely, it means the party that has pledged to abolish the 37% rate because it saps incentive has decided to first boost it to 40% over a substantial range of incomes.
The graph is lumpy further down the income scale for another reason: as the LMITO climbs between $37,000 and $48,000, the separate LITO is is clawed back.
Below are the “including offsets” and “excluding offsets” scales together, to enable you to see the differences. The tax rates people will face are those including offsets.
The graph clarifies the trade-off at the heart of the lamington: it targets tax relief at low and middle earners at the necessary cost of higher rates further up the income scale.
How much of a problem is it? Well, that depends.
It’s a classic example of what economists call the equity-efficiency trade-off.
Arthur Okun, an adviser to US President Lyndon Johnson, described it thusly: redistributing income is like transporting water from one place to another in a leaky bucket – you can do it, but you’d better be prepared to lose some water as you ae doing it.
In much the same way, you can restrict tax cuts to low earners, but that means high earners have to face higher marginal rates which to some degree will shrink economic activity.
The critical question is how much it will shrink economic activity, how leaky is the bucket?
It worsens incentives for the roughly 700,000 Australians earning between $90,000 and $125,000. For every additional dollar each of them earns, the government will take away an extra 3 cents. That might not sound like much, but the evidence suggests it will have an effect.
How? Well, the tax rate increase lowers the benefit of generating additional taxable income. And there are a range of ways to avoid generating additional taxable income. The most obvious is working fewer hours, for example by not working overtime or by working fewer days per week. Secondary earners (often women returning to work after maternity leave) are particularly prone to that kind of response.
But it also could mean not going for promotions or pay rises where they take effort, for example by not gaining extra skills or not putting in additional work effort. And, as I found in a recent study, it could involve claiming more deductions to put a brake on your taxable income.
What will the lamington cost us?
Relying on data for the Australian tax system, I find that a 3 percentage point increase in the marginal tax rate results in an average reduction in taxable incomes of around 0.6%. For someone earning $125,000 per year, that amounts to a reduction in taxable income of $750 per year, by any of the means described above or others.
If we assume the average affected person earns in the middle of the relevant range, that implies an aggregate reduction in taxable income of almost half a billion dollars a year from the 3 percentage point tax increase. That means around $300 million less in consumption and saving and around $200 million less in income tax revenue, all because of LMITO.
That half a billion per year is the real, measurable, and unavoidable cost of targeting the Coalition’s tax break. When economists talk about “distortions” or “deadweight losses” created by tax increases, that’s what they mean. It is the cost of fairness. Whether that cost is worth paying is an open question. The government has evidently decided that it is. And now we can decide at the ballot box, ideally armed with proper information.
But it is of concern that the presentation of the policy – while politically attractive – obscures the genuine increases in marginal tax rates the Coalition’s changes will bring about, and thereby their real economic costs.
Eliminating most offsets and concessions, as recommended by the Henry Tax Review in 2010, would do the tax system good. And it do all of us good by making it easier to see what we are being asked to vote for come election time.
Bill Shorten has promised his government would introduce a A$2.3 billion four year package to slash cancer patients’ out-of-pocket costs, and has committed $1 billion to give extra tax relief for low income earners, above what they would get from Tuesday’s budget.
In his budget reply on Thursday night, the opposition leader pitched to voters on a Labor strength – health – declaring his cancer care plan would be the “most important investment in Medicare since Bob Hawke created it”.
Shorten rejected the government’s second and third tranches of tax cuts, due to start in 2022-23 and 2024-25 and worth about $143 billion of the $158 billion ten year package. The last stage was a “radical, right-wing, flat tax experiment”, far off in time and skewed disproportionately to a relative few, he said.
Stressing Labor’s economic responsibility, Shorten recommitted to delivering “stronger surpluses, paying down debt faster” than the government.
“What we need is a fighting fund for the country, a strong surplus to protect us from international shocks”, he said.
He attacked the government – which has a $7.1 billion surplus in its budget for next financial year – for “shortchanging the NDIS [National Disability Insurance Scheme] by $1.6 billion, to prop up a flimsy surplus forecast”.
Shorten – who in his speech referred to his late mother Ann’s battle with breast cancer – said the cancer care plan would provide for millions of free scans and consultations, and cheaper medicines.
Cancer “is frightening, it’s isolating, it’s exhausting”. And all too often, it was impoverishing, he said.
“For so many people, cancer makes you sick and then paying for the treatment makes you poor. And that’s a fact that I think a lot of Australians would be surprised to learn.
“Because if you haven’t been through it yourself, you might not realise that all those vital scans and tests and consultations with specialists aren’t fully covered by Medicare. Instead, they cost hundreds of dollars, adding up to thousands, out of your own pocket,” he said.
One in four women with breast cancer paid more than $10,000 for two years of scans and tests, he said. Some men with prostate cancer were paying more than $18,000. Most people with skin cancer – and Australia has the highest rates of this cancer in the world – paid more than $5000 for the first two years of treatment.
Each year 300,000 people who needed radiology did not get it, because they couldn’t afford it.
People needing treatment for cancer were often not well enough to work, so they were already under massive financial strain, Shorten said. Those living in regional areas had the extra costs of travel and accommodation.
invest $600 million towards eliminating all out-of-pocket costs for diagnostic imaging, with up to six million free cancer scans funded through Medicare – reducing out-of-pocket costs from hundreds of dollars to zero. This would include MRIs too. At present only half the MRI machines were covered by Medicare, and regional patients often had to drive for hours or pay thousands of dollars. “If we win the election, not only will we provide more MRI machines to communities where they are needed most, but Labor will guarantee that every single MRI machine in Australia that meets a national quality standard is covered by Medicare for cancer scans.”
invest $433 million to fund three million free consultations with oncologists and surgeons. Over four years this would mean an extra three million appointments were bulk billed, reducing costs of hundreds of dollars to nothing
guarantee that every drug recommended by independent experts would be listed on the Pharmaceutical Benefits Scheme.
On tax, Shorten said people earning between $48,000 and $126,000, no matter who they voted for in May, would get the same tax refund.
But the Liberal plan did not do enough for the 2.9 million people who earned less than $40,000 – about 57% of whom were women.
In Labor’s first budget Labor would provide a bigger tax refund for low earners than the Liberals proposed.
“6.4 million working people will pay the same amount of income tax under Labor as the Liberals – and another 3.6 million will pay less tax under Labor,” he said. “All told, an extra billion dollars, for low income earners”.
Under further details provided by Labor, it said workers earning up to $37,000 a year would receive a tax cut of up to $350. For workers earning between $37,000 and $48,000 the value of the tax offset would increase up to the maximum tax offset of $1,080.
A worker on $35,000 would get a tax cut of $255 a year under the Liberals, compared to $350 under Labor. A worker on $40,000 would receive a cut of $480 under the Liberals compared to $549 under Labor.
On TAFE Shorten promised to double the size of Labor’s rebuilding TAFE program – up to $200 million – to renovate campuses.
Labor is committed to paying the upfront fees for 100,000 TAFE places to get more Australians in high priority courses. “I am proud to announce that 20,000 of these places will be allocated to a new generation of aged care workers and paid carers for the NDIS,” Shorten said.
Finance minister Mathias Cormann said Shorten had put forward an agenda for $200 billion in higher taxes that would weaken the economy and bring higher unemployment.
The big surprise in last week’s budget was the size of new income tax cuts – A$158 billion over a decade, in addition to the A$144 billion already promised in last year’s budget.
A lot of the plan doesn’t take effect until 2024-25, so it’s easy to dismiss as tax cuts on the never-never. But given it’s a central plank of the government’s campaign for re-election, it deserves closer scrutiny.
The major part of stage 1 is the Low and Middle Income Tax Offset – giving everyone earning less than $126,000 a cheque in the mail come July and then for the following three years. Stage 2 (2022-23) would lift the top threshold of the 19% and the 32.5% brackets. The biggest cuts would come in stage 3 (2024-25) when the government removed the 37% bracket and cut the 32.5% rate to 30%.
Everyone earning between $45,000 and $200,000 would face the same 30% marginal tax rate.
Unsurprisingly, in absolute terms the biggest beneficiaries would be high-income earners. More than half the benefit would go to the top 20% of earners, those with taxable income over $87,500 a year.
But to better understand what the plan would do to the progressivity of the system, we need to consider what would happen to rates without the plan.
Without change, the average tax rate would increase across the income distribution, as wage growth pushed people into higher tax brackets.
The plan would prevent some of that bracket creep by lowering future tax rates.
Most taxpayers would be better-off than without a change – but high-income earners would benefit the most.
It goes part-way to addressing bracket creep for low and middle income earners. Someone in the middle of the income distribution would pay 3.6% more tax in 2029-30 than today, instead of 6.1% more without the plan.
But Australia’s highest earners – the top 15% of taxpayers – would escape bracket creep entirely, paying the same average tax rate or less in 2029-30 than today.
This result would be a shift in the proportion of tax paid at different points in the income distribution.
Middle earners, those earning between the third to top and the third to bottom ten percents of the income distribution, would pay a larger share of tax in 2029-30 than they do today: 23% compared to 20%.
But high-income earners, those in the top fifth of the income distribution, would pay a smaller share of tax: 65% in 2029-30 compared to 68% today.
It’s more a tax cut than tax reform
The government has been keen to sell the tax package as a “huge reform” because it removes an entire tax bracket.
It says flattening the tax scale would create a greater incentive for higher-income earners to work. But unlike earlier tax reform packages, there has been little in the way of clear articulation or modelling to demonstrate that this would be the case. And there are reasons to doubt that it would be the case.
The people who would benefit most from the tax reform would be in the top 6% of the income distribution in 2024-25. Barring major changes to gender work patterns in the next five years, they would be disproportionately men, working full time. But as the Henry Tax Review pointed out, the people who are the most responsive to changes in effective tax rates are second-earners (mainly women) working part-time.
Proper reform of the income tax system would lower the economic barriers to second-earners working more: the increase in tax, the cuts in family and childcare benefits and higher childcare costs that accompany working more.
And it might not be affordable
The budget numbers point to a decade of surpluses, exceeding 1% of GDP by 2026-27, even with the tax cuts. But the surpluses rely on payments as a share of gross domestic product falling steadily over the decade, from 24.9% of GDP today to 23.6% by 2029-30.
Achieving such a reduction would require significant cuts in spending growth across almost every major spending area, during a period when we know that an ageing population will increase spending pressures, particularly on health and welfare. The Parliamentary Budget Office says ageing will add 0.3% of GDP a year to spending by 2028-29.
The approach marks a change since the 2016-17 budget, when the government forecast that payments would grow as a share of GDP over the decade because of the ageing population. There have not been enough significant savings measures in the past three budgets to explain the turnaround. It appears to be more driven by assumption than by reality.
If we were to make the still-conservative assumption that spending remained merely constant as a share of GDP at 24.9%, the third stage of the tax cuts would push the budget back into deficit in 2024-25.
The bottom line
The pre-election tax package finally does something about bracket creep – but solves it only for the highest of earners.
It passes up the opportunity for more comprehensive reform. And most disconcertingly, it punches a sizeable hole in government revenue just at the time an ageing population will start to demand that more money be spent.
Another federal budget, and yet more tinkering to superannuation tax breaks. But the latest changes will only help older wealthier Australians. The losers are younger workers and taxpayers.
What’s the plan?
From July 1 2020, Australians aged 65 and 66 will be able to make voluntary pre- and post-tax superannuation contributions without having to pass the Work Test, under which they are required to work a minimum of 40 hours over a 30-day period.
About 55,000 Australians aged 65 and 66 will benefit from these changes at a cost of A$75 million over the next four years.
It’s another boost for tax planning
Treasurer Josh Frydenberg says the changes will help Australians save for their retirement.
But most 65- and 66-year-olds still working to top up their superannuation are already eligible to make voluntary super contributions, because they satisfy the Work Test. Working 40 hours over a 30-day period – or little more than one day each week – is hardly onerous.
For every dollar contributed to super that genuinely helps Australians save more for their retirement as a result of these changes, there will be many more dollars funnelled into super to make extra use of superannuation tax concessions.
The biggest winners will be wealthier retired 65- and 66-year-olds with other sources of income, such as from shares or property, which they will now be able to recycle through superannuation.
They will be able to put up to $25,000 into super from their pre-tax income and then – because super withdrawals are tax-free – take the money back out immediately. Their contributions to super are taxed at only 15%, whereas ordinary dividends or bank interest is taxed at their marginal tax rate. The tax savings can be as high as $5,000 a year.
Such strategies aren’t costless: other taxpayers must pay more, or accept fewer services, to make up the difference.
It will mean larger inheritances
The government is also allowing 65- and 66-year-olds to make three years’ worth of post-tax super contributions, or up to $300,000, in a single year.
These changes will mainly boost inheritances.
Most people who make after-tax contributions already have large super balances and typically contribute from existing pools of savings to minimise their tax.
Grattan Institute’s 2016 report, A Better Super System, found that only about 1% of taxpayers have total super account balances of more than $1 million, yet this tiny cohort makes almost one-third of all post-tax contributions.
These changes will turbo-charge so-called “recontribution strategies” that minimise the tax paid on superannuation fund balances passed on as inheritances. When inherited, super fund balances originally funded by pre-tax contributions can be taxed at 17% (including the Medicare levy), depending on the age of the deceased and the beneficiary.
To avoid this tax on their estate, individuals can withdraw superannuation funds tax-free and contribute them back as a post-tax contribution, up to the annual post-tax contributions cap of $100,000 each year.
It fails the government’s own test
In 2016, the government tried – but failed – to define the purpose of superannuation as providing “income in retirement to supplement or substitute the Age Pension”.
The proposed objective rightly implied that super should not aim to provide limitless support for savings that increase retirement incomes.
The benefits of super changes should always be balanced against the costs of achieving them. The government’s latest changes fail that test.
This year’s budget includes $448.5 to modernise Australia’s Medicare system, by encouraging people with diabetes to sign up to a GP clinic for their care. The clinic will receive a lump sum payment to care for the person over time, rather than a fee each time they see their GP.
The indexation freeze on all GP services on the Medicare Benefits Schedule (MBS) will lift from July 1, 2019, at a cost of $187.2 million. The freeze will be lifted on various X-ray and ultrasound MBS rebates from July 1, 2020.
The budget announces $461 million for youth mental health, including 30 new headspace centres, some of which will be in regional areas. But it does little to address the underlying structural reforms that make it difficult for Australians to access quality and timely mental health care.
In aged care, the government will fund 10,000 home care packages, which have been previously announced, at a cost of $282 million over five years, and will allocate $84 million for carer respite. But long wait times for home care packages remain.
Other announcements include:
$62.2 million over five years to train new rural GPs
$309 million for diagnostic imaging services, including 23 new MRI licences
$331 million over five years for new pharmaceuticals, including high-cost cancer treatments
$107.8 million over seven years for hospitals and facilities including Redland Hospital, Bowen Hospital, Bass Coast Health and Ronald McDonald House
$70.8 million over seven years for regional cancer diagnosis, treatment and therapy centres
$114.5 million from 2020-21 to trial eight mental health facilities for adults
$43.9 million for mental health services for expectant and new parents
$35.7 million over five years for increased dementia and veterans’ home care supplements
$320 million this year as a one-off increase to the basic subsidy for residential aged-care recipients.
Here’s what our health policy experts thought of tonight’s budget announcements.
A hesitant step forward for Medicare
Stephen Duckett, Director, Health Program, Grattan Institute
Medicare funding is slowly creeping into the 21st century. The 19th-century model of individual fees for individual services – suitable for an era when medicine was essentially dealing with episodic conditions – is being supplemented with a new fee to better manage the care of people with diabetes.
The budget announcement, as part of the Strengthening primary care package, is for a new annual payment for each person with diabetes who signs up with a specific GP. Funding is provided for about 100,000 people to sign up – about 10% of all people with diabetes in Australia.
The precise details of the new fee – including the annual amount and any descriptors – have not yet been released. But it should encourage practices to move towards a more prevention-oriented approach to chronic disease management, including using practice nurses to call patients to check up on their condition, and using remote monitoring technology.
The budget announcement contained no evaluation strategy for the initiative. The government should produce such a strategy soon.
Support for aged and disability care
Hal Swerissen, Emeritus Professor, La Trobe University, and Fellow, Health Program, Grattan Institute
The budget has short-term measures to address major issues in aged care and disability while we wait for the royal commissions to fix the long-term problems.
The National Disability Insurance Agency (NDIA) is struggling with the huge task of putting the National Disability Insurance Scheme (NDIS) in place.
There has been a major under-spend on the on the scheme. Price caps for services such as therapy and personal care are too low and nearly one-third of services are operating at a loss. The under-spend would have been more if there hadn’t been a last-minute budget decision to significantly increase service caps, at a cost of $850 million.
$528 million dollars has also been announced for a royal commission to look at violence, neglect and abuse of people with disabilities – the most expensive royal commission to date.
There is more funding for aged care. Currently, 130,000 older people are waiting for home care packages – often for a year or more. Nearly half of residential care services are losing money and there are major concerns about quality of care.
The short-term fix is to give residential care $320 million to try to prevent services going under. The budget includes 10,000 previously announced home care packages, at a cost of $282 million, but that still leaves more than 100,000 people waiting.
Little for prevention, Indigenous health and to address disparities
Lesley Russell, Adjunct Associate Professor, Menzies Centre for Health Policy, University of Sydney
Prevention
Preventable diseases and conditions are a key factor in health inequalities and rising health-care costs. The two issues looming large are obesity and its consequences, and the health impacts of climate change.
There is $5.5 million for 2018-19 and 2019-20 for mental health services in areas affected by natural disasters, and $1.1 million over two years for the Health Star rating system – otherwise nothing for primary prevention.
Indigenous health
The Treasurer did not mention Closing the Gap in his budget speech, and there is little in the budget for Indigenous health.
Just $5 million over four years is provided in the budget for suicide-prevention initiatives. And the Lowitja Institute receives $10 million for health and medical research.
$21.9 million for the Connected Beginnings program to help Indigenous children in Tasmania make a positive transition to school
$6.3 million to continue the development of the Health Data Portal for services funded under the Indigenous Australians Health Program.
Inequalities and disparities
Disadvantaged rural and remote communities will (ultimately) benefit from efforts to boost National Rural Generalist Training Pathway, with $62.2 million provided over four years. This was a 2016 election commitment.
The announcement of $200 million over three years to index Medicare payments for ultrasound and diagnostic radiology services (beginning from July 1, 2020) came with claims this will help reduce out-of-pocket costs. But given that these payments have not been indexed in 20 years, will the money go to providers or patients?
Hospitals and private health insurance
Peter Sivey, Associate Professor, School of Economics, Finance and Marketing, RMIT University
There are no major changes to public hospital funding arrangements in this year’s budget.
It’s business as usual for hospital funding, aside from funding injections for a handful of hospital sites. By VILevi
Funding for public hospitals is predicted to increase at between 3.7% and 5.6% over the forward estimates. However, these figures are contingent on the new COAG agreement on health funding between the Commonwealth and states, which is due to be finalised before the end of 2019.
The states will be hoping to wring some more dollars from the federal government given their soaring public hospital admissions and pressure on waiting times.
Government spending on the private health insurance rebate is projected to increase more slowly than premiums at between 1.8% and 3.2% because of indexation arrangements which are gradually reducing the rebate over time.
Smaller targets for mental health
Ian Hickie, Co-Director, Brain and Mind Institute, University of Sydney
Numerous reports and accounts from within the community have noted the flaws in Australia’s mental health system: poor access to quality services, the uneven roll-out of the NDIS, and the lack of accountability for reforming the system.
The next federal government faces major structural challenges in mental health and suicide prevention.
Not surprisingly, this pre-election budget does not directly address these issues. Instead, it focuses on less challenging but worthy targets such as:
continued support for expansion of headspace services for young people ($263m over the next seven years) and additional support for early psychosis services ($110m over four years)
support for workplace-based mental health programs ($15m)
support for new residential care centres for eating disorders ($63m).
A more challenging experiment is the $114.5 committed to eight new walk-in community mental health centres, recognising that access to coordinated, high-quality care that delivers better outcomes remains a national challenge.
Despite the commitment of health minister Greg Hunt to enhanced mental health investments, the total increased spend on these initiatives ($736.6m) is dwarfed by the big new expenditures in Medicare ($6b), improved access to medicines ($40b), public hospitals ($5b) and aged care ($7b).
It will be interesting to see whether mental health reform now receives greater attention during the election campaign. At this stage, neither of the major parties has made it clear that it is ready to deal directly with the complex challenges in mental health and suicide prevention that are unresolved.
New funding for research, but who decides the priorities?
Philip Clarke, Professor of Health Economics, University of Melbourne
The budget contains several funding announcements for research.
The government will establish a Health and Medical Research Office, to help allocate money from the Medical Research Future Fund (MRFF). This will be needed, as the budget papers commit to a further $931 million from the MRFF for:
Clinical trials for rare cancers and rare diseases
Emerging priorities and consumer-driven research
Global health research to tackle antimicrobial resistance and drug-resistant tuberculosis.
The budget includes funding for consumer-driven research and drug-resistant tuberculosis. i viewfinder/Shutterstock
In addition, the budget includes:
$70 million for research into type 1 diabetes
a large investment for genomics (although that is a re-announcement of $500 million promised in last year’s budget)
a series of infrastructure grants to individual universities and institutions, such as $10 million to establish the Curtin University Dementia Centre of Excellence.
The government appears to be moving away from allocating medical research funding through existing funding bodies, such as the National Health and Medical Research Council (NHMRC), towards allocating research funds to specific disease areas, and even to individual institutions.
This is a much more direct approach to research funding, but it raises a few important questions. On what basis are these funding decisions being made? And why are some diseases considered priorities to receive funding? There is very little detail to answer these questions.
Australia’s allocation of research funding through the MRFF is diverging from long-held traditions in other countries, such as the United Kingdom, which apply the “Haldane principle”. This involves researchers deciding where research funding is spent, rather than politicians.
* This article has been updated since publication to clarify the 10,000 home care packages have been previously announced.
The government has extended the energy payment to people on Newstart – after excluding them only days ago.
Treasurer Josh Frydenberg said the decision was made at a meeting on Tuesday night of Scott Morrison, Finance Minister Mathias Cormann and himself. He indicated it was about smoothing the passage of the measure through the parliament.
There was widespread criticism of the exclusion of Newstart recipients from the payment, which will be A$75 for a single person and $125 for a couple.
The money is due to go out very soon and the government needed the legislation to pass immediately. While Labor had flagged it would support the one-off payment, the legislation could have been amended, because the government is in a minority in the House of Representatives.
The payment was originally set to be confined to those on the age pension, disability support pension, carers payment, parenting payment single recipients, and veterans and their dependants receiving payments.
The extension, which will also cover those on Youth Allowance and other working age payments, bringing the number of recipients to five million, will add some $80 million to the original cost of $284.4 million.
Labor seized on the backdown, seeking to suspend standing orders to move a motion in the House saying the government’s backflip “has already blown an $80 million hole in the budget”, and showed the budget was “unravelling less than 24 hours after it was delivered”.
The motion condemned the government for “only looking after the top end of town and treating vulnerable Australians as an afterthought”. The attempt to suspend standing orders failed.
Frydenberg, speaking to the National Press Club, explained the original exclusion by saying three-quarters of people on Newstart moved off it within 12 months, and 99% of people on it received another payment.
“They get a parenting payment or they get a family tax benefit payment, whereas when you’re on the Disability Support Pension or on the aged pension, you tend to be on it for longer, and that seems to be – that is your principal form of payment”.
Frydenberg said the change “will secure the passage of the piece of legislation through the parliament”.
Appearing on the ABC Q&A on Monday, Liberal senator Arthur Sinodinos could not say why Newstart recipients had been excluded from the payment. “The short answer is I don’t know why,” he said. He also said he thought Newstart was too low.
If Twitter is the revolutionary version of blogging, TikTok might be the revolutionary version of YouTube. Both Twitter and TikTok encourage their users to post shorter, more fragmented content than their precursors.
TikTok, owned by the Chinese tech giant ByteDance, is the international version of China’s short video sharing app, Douyin.
TikTok is not the first Chinese social media platform to go international, although it is likely the first to gain traction with non-Chinese users globally. WeChat and other Chinese social media platforms that have gone global have, in fact, been predominately used by international Chinese citizens.
But TikTok is not yet a complete success story. The video-sharing platform may have broken into some non-Chinese markets, but it still has a lot to learn when it comes to outside regulations and culture.
And this is true for Chinese apps generally – they face obstacles refining their global strategies, particularly in navigating China’s notorious internet censorship.
Chinese social media is already going global
Some scholars attribute the success of Chinese social media to the censorship and isolation of China’s internet. This is because China’s Great Firewall prevents foreign social media from entering the Chinese market.
Nevertheless, many China-based social media platforms, such as Weibo, WeChat, You Ku, Blued and Douyin, are seeking to expand into the global market.
WeChat, for instance, tried (and failed) to expand into the non-Chinese overseas market, even hiring soccer star Lionel Messi to front their advertising campaign.
Unlike the global strategies of its peers, ByteDance has never merged Chinese and international digital realms. Instead, it created a separate app, TikTok, specifically for going abroad.
TikTok and Douyin. Screenshot of the author’s phone
In fact, ByteDance spent A$1.42 billion to purchase Musical.ly, to target the teenage market in the US. On August 2, 2018, ByteDance merged Musical.ly into TikTok, an exceptional boost for TikTok’s success.
TikTok is trying to remove its Chinese roots
Douyin and TikTok are branded as the same product, but they each have distinct characteristics depending on their marketing target. This is wise for ByteDance’s global ambition, given Chinese internet culture doesn’t always translate in a global context.
Interfaces of TikTok (left) vs Douyin (right) Author provided (screenshot of app interfaces)
For instance, TikTok, unlike Douyin, has a set of westernised stickers and effects on its interface, as you can see in the picture above.
Still, some prevailing Chinese traits appear in TikTok that emerged from Douyin, such as a meibai (美白, literally meaning “beautify whitening”) camera tool.
A preview photo of TikTok from an Australian app store. Author provided, Author provided
But the pursuit of white skin isn’t a social motivator in most western countries, and technological constraints like this are easily noticed.
Despite ByteDance’s efforts to minimise Chinese culture in its international app, it is still difficult for TikTok to fully understand western culture.
And this is especially true of other Chinese social media platforms, which don’t really endeavour to incorporate global cultures at all. For instance, WeChat’s mobile payment service, WeChat Pay, only allows Chinese citizens with a Chinese bank account to set up an account.
Global app with Chinese regulations
In April 2018, Chinese internet regulators accused ByteDance, of spreading “unwholesome” content through Douyin.
This includes child users who are making money by live streaming or posting advertising videos on Douyin. And to gain more Douyin followers, some children, for instance, have been reported as recording suggestive gestures or dances.
ByteDance’s chief executive Zhang Yiming responded by saying the company would increase its content moderation team from 6,000 staff members to 10,000. But ByteDance refused to disclose how many of these 10,000 moderators would work for TikTok, and whether the content standards for American users are the same as those for Chinese users.
Chief executive of Common Sense Media James P Steyer said children on TikTok are “significantly too young for it”.
It’s not that the content on TikTok isn’t okay for your 15-year-old. It’s what happens to your six or seven-year-old.
Last month, TikTok was penalised A$8 million by the US Federal Trade Commission due to its violation of Children’s Online Privacy Protection Act.
ByteDance’s low-level attention to underage users on Douyin and TikTok shows the lack of structural mechanisms in place for protecting children in China. And there are possibilities for more unforeseen circumstances due to nontransparent regulation of social media within China.
While TikTok agreed to pay the largest ever penalty in a children’s privacy case in the US, there is still much for it to learn and adapt in the global market.
